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Int'l Macro Vision: Sector Synopsis

Int'l Equity Strategy



Following the MSCI ACWI (ACWI-US) breakout to all-time highs above $84 resistance, our outlook remains bullish and we continue to believe that the path of least resistance is higher for global equities. We see global equities as being in a goldilocks scenario where market dynamics and technicals are arguably 100% bullish. Of course, at some point this almost too good to be true scenario is likely to result in a pullback, but for now we see no signs of this rally letting up. Additionally, this goldilocks scenario has only been in effect for a week or so, and it can continue for weeks or months; we believe a melt-up is likely in the weeks – and potentially months – ahead. As always, we will be monitoring market dynamics closely for signs of weakness. Below we summarize the basis for our bullish outlook.

What supports our bullish outlook? (1) Not one broad global index (MSCI ACWI, ACWI ex-US, EAFE, or EM) is breaking below a key support level; in fact, several are hitting multi-month or all-time highs, (2) the US dollar is breaking below key support at 92, (3) defensive Sectors such as MSCI ACWI Consumer Staples, Utilities, Health Care (i.e., mega-cap pharma), and Real Estate continue to make lower highs in terms of relative strength, (4) the MSCI ACWI Consumer Discretionary vs. Staples ratio remains in an uptrend, (5) small-caps have emerged as leadership in the US and non-US markets, (6) high yield spreads in the US and Europe continue to make lower highs and remain devoid of bullish inflections, (7) the 10-year US Treasury yield is at multi-month highs, and (8) commodities (Bloomberg Commodity Index, WTI & Brent crude oil, and copper) are hitting multi-month highs. These are all signs of a risk-on environment, and one where a bullish outlook is appropriate.

What are the risks to our bullish outlook? First, despite the US 10-year yield being at multi-month highs, it is still moving in a broad horizontal range. Additionally, the 10-year German Bund yield is near multi-month lows, and is also moving in a broad horizontal range. This tells us the bond market is not expecting robust global growth looking out 3-6+ months. If sovereign yields in Europe were to break lower it could create problems for global equities. Second, the MSCI EM Consumer Discretionary vs. Staples ratio shows an uptrend violation; we are watching this closely, however for now it is one of the few yellow flags considering the ratio is simply moving sideways. Additionally, it goes without saying that any number of the bullish items listed in the above paragraph could take a turn for the worse, which would negatively affect our outlook.

Bottom line: As long as market dynamics remain largely positive and the MSCI ACWI (ACWI-US) and EM (EEM-US) indexes are above their respective intermediate-term support levels we believe a bullish outlook is warranted. Support levels to watch include $84 on ACWI-US and $46.30 on EEM-US.